“ The Japanese Automotive Global Production Network In Line With Its FDI In The Case of Indonesian Automotive Sector in Southeast Asia Region “ DESSY IRAWATI

2 OUTLINE Introduction Aim & Methodology Global Production Network, Knowledge Diffusion, and Local Capability Formation: The Case of Indonesian Automotive Industry Technology Transfer to Knowledge Transfer: Learning Aspect From Knowledge Network In the Automotive Sector Fostering The Global-Local Alliance Formation for The Case of Indonesian Automotive: Innovation, Learning, and Network Forging The Automotive Industrial Production Networks and Macro Regional Integration in Japan and Southeast Asia Conclusion

3 INTRODUCTION The automotive industry is one of the stereotypes for academic research, i.e.: (1) economic; (2) organizational and management; (3) technology; (4) policy, and (5) geographical location of industry (Womack et.al 1990, Kenney & Florida 1993, Florida et. al 1998, Rutherford 2000), predict the Japanese automotive MNEs context will emerge as globalization and direct competition between different productions systems lead to survival of the most efficient economies. Thus, inward automotive FDI serves a transmission vehicle for the best practices of the investing regions Raymond Vernon (1996) cited that the auto industry as an example of a mature industry and the Japanese have emerged as a result of higher oil prices and environmental concerns to generate a whole range of product and manufacturing innovations (Ichiro 1991). In 1970s, the mature of auto industry seemed ripe for diffusion to developing countries in line with product-cycle predictions the automotive industry in ASEAN-4 is now seeking to regionalize the dense web of mutually reinforcing ties in the automotive industry

4 In 1970 the mature of auto industry seemed ripe for diffusion to developing countries in line with product-cycle predictions, the potential for auto production by developing countries gave the impression when ASEAN-4 (i.e. Thailand, Indonesia, Malaysia, and The Philippines) initiated their automotive efforts in the late 1960s and early 1970s (Hideki 1988, Doner 1991, Han 1994) Asia (including ASEAN) is perhaps the most suitable site in the world for Japanese expansion in the automotive industry. Besides the fact that it is right next to door to Japan, the region is still developing. Importantly for efficient just in time manufacturing system (Dicken 1988, Doner 1991, Dicken 1992, Dicken 2003) Asia is filled with ‘developmentalist-minded’ governments that are eager to have their economies leavened not only by Japanese capital and technology, but also by Japanese guidance on government intervention and industrial organization (Dicken 1988, Hatch & Yamamura 1996, Borrus 1992, Dicken 2003)

5 AIM & METHODOLOGY Aim: This research intend to demonstrate that Japan is not only plugging into the region’s economy energy but also transforming and promoting the host country in technology-based production alliance as opposed to most neoclassical economist view that Japan is really ‘doing nothing extraordinary’ at all in Asia and ASEAN (Aoki 1988, Miyakawa 1991, Mair 1994, Ernst 2000) Methodology Case Study approach: qualitative research and secondary data for statistic and numerical data Descriptive & Explorative study on the Automotive cluster and its learning aspect along with its linkages in Indonesia Semi-structured interview with the automotive actors (car makers and their suppliers), government, industrial estate developer, university/research institution Field work & observation in the car plants for 4 months On-Going Correspondent with the interviewees

6 Global Production Network, Knowledge Diffusion, and Local Capability Formation: The Case of Indonesian Automotive Industry Despite the long trajectory over decades to swift from being dependent host country in 1990s by importing up to 90 % of their parts and material and now Indonesia has become the exporter to another international market including Japan itself (Sugiyama 2000, ADB 2005, Gaikindo 2007, Toyota 2007, Honda 2007) However, the inclination of Indonesian automotive dominated by the auto Japanese, also has triggered growing number of the local suppliers used by Japanese auto manufacturers, although they are ‘still’ Japanese affiliates (West 2000) In the quest for efficient supply networks, Japanese automakers in Asia are doing something that American/Europeanmanufacturers would never dream of doing so (Hatch & Yamamura 1996). They are teaming up to form what could be considered ‘super keiretsu’. e.g: Toyota-Nissan-Isuzu, Mitsubishi-Suzuki. This cooperation was designed partly to satisfy demands for ASEAN market and partly to maintain Japanese domination of the local market

7 For Indonesian auto firms, the benefit of developmentalism via quasi-integration is large, particularly in the early stage of network formation (Odaka 1988, Kayaka 1991, Kasahara 2004, Ministry of Trade and Industry Republic of Indonesia 2005). That is when these firms receive invaluable infusions of capital, technology, and managerial guidance; the Japanese government-business network is contributing. Even though there is still unequal cooperation (Yeung 2000, Schmitz 2000, Terry 2002, Wolf 2004).This case is indeed a reflective of what has happened in the case of indigenous auto part companies in the host country who are not part of Japanese automakers neither first tier nor second tier With this in mind, there are some concerns to be taken into consideration by Indonesian government to ensure Indonesian economy do not become captive members of a Japanese production alliance, also for another MNEs globalization attack that is Indonesia (and ASEAN region) must do more to increase their own technological capacities (UNCTAD 2007). This means investing wisely in education, training, and creating stronger links between public research facilities, particularly universities and private industry

8 The Impact of Japanese Auto FDI 1. the movement of Japanese MNEs in the automotive industry into a regional economy increases employment levels in the region (Sugiyama 2000, ADB 2005) 2. The location of Japanese FDI in the automotives, which is spreading across Java region, it has been providing this region with an opportunity for contact and catch-up with new technology and innovation in the automotive and, therefore has enhanced the indigenous growth (Doner 1991, Sugiyama 2000) 3. Japanese automotive affiliates, by using the products of indigenous firms, will enable local firms to expect increased scale of economies and this will bring about a further increase in indigenous invention and innovation (Han 1994, Terry 2002) 4. overseas inward investment tends to have multiplier effects in this region through increased inter-industry linkages. Either through direct investment and attraction of component suppliers from local or through the purchase of labour and intermediate products (Doner 1991, UNCTAD 2007 )

9 Technology Transfer to Knowledge Transfer: Learning Aspect From Knowledge Network In the Automotive Sector In line with Japanese understanding of knowledge as primarily ‘tacit’–something not easily visible and expressible; hence, most of the Japanese automakers segment tacit knowledge into two dimensions (Mito 1990, Nonaka & Takeuchi 1995). Firstly is the technical dimension, which encompasses informal and crafts in the term know-how. Secondly is cognitive dimension consisting of mental models, beliefs, ‘credo’, and perceptions and it is shaped by the surrounding environment. The FDI (in the automotive industry) serves as a particularly effective mode of technology transfer (Ichiro 1991, Chen 1996, Honda 1991, Guy 1991, Toyota 2000) Unlike European and American companies, which utilize written manuals and detailed job description (Nonaka & Takeuchi 1995), Japanese support their production management methods and their technical training all the way through OJT (On the Job Training) The old wave of Japanese FDIs’ particularly in developing countries in ASEAN-4 has been changed (Ichiro 1991, Miyakawa 1991, ADB 2005, Ozawa 2005). In other words, in investing directly in ASEAN-4, Japanese MNEs have shown tendency to place their plant sites in the lucrative market countries where their products have already dominated particularly in Indonesian market

10 Fostering The Global-Local Alliance Formation for The Case of Indonesian Automotive: Innovation, Learning, and Network At the beginning, Japan’s economic cooperation policy in Southeast Asia was based on the need to secure a steady supply of raw materials and a low-cost production on the need to secure a steady supply of raw materials and a low-cost production base for textiles, electronics, and another labour intensive industry. However, in the mid-1980s, the ground beneath that policy shifted when dramatic appreciation of the yen undermined the international competitiveness of virtually all manufacturing enterprises that export from Japan (Hideki 1988, Mai 1991, Borrus 1992, Kodama & Kiba 1994, Ozawa 2005) Japanese industry particularly exporting industry in the automotive began to see the region as an extension of its home base (Tokunaga 1993, Hatch & Yamamura 1996, Terry 2002). Because of that, the government-business network promoted new vision of Southeast Asia as integral parts of a Greater Japan, critically important links in an expanded Japanese production and exporting alliance (Hideki 1988, Kayoko 1991, Borrus 1992, ADB 2005) particularly in the Asia- Pacific region as ‘one large economic zone and centre of the growth’ (FAIR 1989, UNCTAD 2007)

11 Forging The Automotive Industrial Production Networks and Macro Regional Integration in Japan and Southeast Asia The Southeast Asian region in fact is a buzzing with a competitive energy that is more than a little reminiscent of the katō kyōsō (excessive competition) (Aoki 1987). Each automotive manufacturer enters this regional rat race, with high-volume technology investment for expanded production facilities, increase output, reduce costs, boost exports and grab larger shares of the global market The alliances that in Japan are called as vertical keiretsu that reflect what could be called as vertical quasi-integration-a unique form of cooperation that lies somewhere between vertical integration of transaction within a single firm and long-term contracting between a stronger and a weaker firm (Aoki 1987, Hideki 1988, Kodama 1994, Hatch & Yamamura 1996)

12 The Evolution of Japanese Network in Asia Source: Hatch & Yamamura (1991) Source: Toyota Motor Corp. (2000) Toyota Motor Networks ASEAN-4

13 CONCLUSION The perspective of forging the automotive industrial production networks and macro regional integration is equally valid for all Asian economies (ASEAN in particular), but not for all industries; like it has been suggested that this analysis applies best to manufacturing industries, especially high-tech industries such as automotive industry. The Auto industry, additionally, can function as an engine, transforming a low wage, labour intensive, and developing economy into a higher-wage, technology-intensive, and developed economy The analysis is not an outlook analysis that cannot and does not attempt to predict what might happen in the relatively distant future. In fact, this analysis is an attempt to reflect on what has happened in the beginning and what has been going on in the automotive industry in Indonesia (including ASEAN and Asia). In view of that, this analysis is trying to fill in the gap between the theory and the practice of the Asian automotive industry, which has been dominated by the Japanese MNEs particularly for Indonesian automotive in regional context The Japanese approach to organizational knowledge creation can be applied outside Japan and that the key adjustment needed is a prolonged phase of socialization and externalization. This adjustment is needed because it takes time for people from different cultures to share tacit knowledge

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